The Associated Press
The New Mexico Legislature’s decision to phase out state reimbursements to local governments for not taxing food and medicine could lead some city and county governments to raise taxes.
The plan adopted by the Legislature on March 16 will require large and mid-sized city and county governments starting in 2016 to accept a payout between 6 percent and 7 percent smaller each year until the state’s “hold harmless” subsidies for the food and medicine taxes are entirely eliminated by 2030.
The city of Las Vegas took in about $1.2 million in hold harmless funding during the 2010-11 fiscal year, which equates to 11.6 percent of the city’s general operating budget, Mayor Alfonso Ortiz said. He said the provision to eliminate the hold harmless subsidies was introduced at the last minute.
The hold-harmless provision for cities and counties came into being after the Legislature decided in 2004 to eliminate gross receipts, or sales, taxes on most food items, medicine and medical services. The idea was that the state would absorb the lost tax revenue and spare local governments from the impact.
The elimination of the hold-harmless provision this year was a key component in a tax reform package backed by Gov. Susana Martinez, who is expected to sign the legislation into law.
Getting rid of the hold-harmless provision for cities and counties, which will effectively increase revenue for the state, was intended to offset financial losses from state tax cuts in the package. To help local governments deal with the phase-out of the hold-harmless subsidies, the Legislature agreed to let affected municipalities or county governments increase local gross receipts taxes by as much as 3/8 of 1 percent on goods or services, except food and medicine.
The Albuquerque Journal reports that some local governments say that tax hike may be needed, explaining that the lost state money adds new financial pressure to local budgets already strained by earlier cuts that were needed to weather years of economic recession.
In Albuquerque — the state’s No. 1 recipient of the funds — the change will mean about $2.2 million less in annual state funding starting in 2016. The yearly budget cut would double to nearly $4.5 million in 2017 as the annual losses compound.
Overall, the reduced state subsidies are expected to affect the 21 largest of the state’s 104 incorporated communities and the 12 largest of its 33 counties. Cities with fewer than 10,000 residents and counties with fewer than 48,000 will continue to receive the hold-harmless subsidies.
San Juan County CEO Kim Carpenter said his county faces a situation in which it either has to cut services and jobs or raise taxes. “There’s no middle ground,” Carpenter said. “There’s no way we can do nothing.”
San Juan County would lose hold-harmless subsidies of about $156,000 per year the first year the cut takes effect, based on the total $2.6 million the county received in 2012. The full hold-harmless payment represented about 1.8 percent of San Juan County’s $140 million budget in 2012.
However, Carpenter said past budget cuts and continued declines in the region’s struggling energy industries make even $156,000 of added losses in 2016 unbearable.
Sen. John Arthur Smith, a Democrat from Deming who led the crafting of the tax package and advocated the repeal of the hold-harmless subsidies, said fears voiced about local tax increases amount to political posturing. “I just think they’re crying wolf when it’s not necessary,” Smith said.
Some local governments say the reduced hold-harmless payments likely won’t break the bank.
Albuquerque leaders are reviewing how other tax policies included in the just-passed tax legislation might help the city attract new business and potentially offset the loss of nearly $37 million in state subsidies by 2030, said Albuquerque Mayor Richard Berry.
An Albuquerque tax increase is off the table initially, but Berry said the city needs more analysis on the full tax package to determine how the changes will affect Albuquerque’s long-term budget plans.
Editor’s note: The Optic’s Martín Salazar contributed to this report.